Core views

On August 29, the company released its semi-annual report for 2023. In the first half of the year, the company achieved operating income of 132,592 billion yuan, a year-on-year increase of 18.70%, realized net profit of 2,610 billion yuan, a year-on-year decrease of 29.38%, realized net profit of 2.199 billion yuan after deduction, a year-on-year decrease of 17.96%, and achieved basic earnings per share of 0.71 yuan. Profit growth was lower than our expectations. In 2023, the in-hospital diagnosis and treatment order will return to normal, the company's distribution sector is expected to achieve restorative growth, and the superposition processing sector will enter a harvest period. We expect the company's revenue and profitability to increase simultaneously.

occurrences

The company released the 2023 semi-annual report. Profit growth was lower than our expectations. On August 29, the company released the 2023 semi-annual report, achieving revenue of 132,592 billion yuan, an increase of 18.70% over the previous year, a year-on-year net profit of 2,610 billion yuan, a year-on-year decrease of 29.38%, a year-on-year decrease of 2.199 billion yuan, a year-on-year decrease of 17.96%, achieving earnings per share of 0.71 yuan, and profit growth lower than our expectations.

Brief review

The commercial sector is recovering at an accelerated pace, and impairment affects profit growth

In the first half of 2023, the company's revenue side increased by 18.70%, mainly due to the accelerated recovery of the commercial sector. In the first half of the year, revenue increased 19.50% year-on-year to 117.893 billion yuan, and the industrial sector grew steadily. Net profit after deducting non-return income decreased by 29.38% year on year, net profit not attributable to parent decreased 17.96% year on year, and the growth rate was lower than that of the revenue side, mainly due to: 1) Shanghai Pharmaceutical Cansino's impairment affected profit by about 466 million yuan. After excluding this effect, net profit without return of this influence was basically flat at 2,666 billion yuan; 2) gross margin of the company's distribution sector fell 0.95 percent to 6.14%, mainly due to the expansion of mining and category structure changes. 3) In the first half of last year, the subsidiary Qingchunbao's relocation revenue formed a large non-recurring profit and loss, which led to a large net profit base for return. Excluding relocation income and the impact of Cansino's impairment one-time special profit and loss, the company's net profit for the first half of the year increased 9.34% year-on-year to 3,076 billion yuan.

In the second quarter of 2023, the company's revenue increased 21.08% year on year to 66.366 billion yuan, mainly due to: 1) the continuous restoration of in-hospital diagnosis and treatment order in Shanghai, and the company's commercial sector revenue increased 22.15% year on year; 2) Chinese medicine products and some major industrial varieties continued to be released, and the overall growth of the industrial sector was steady.

In 23Q2, the company achieved net profit of 1,092 million yuan, a year-on-year decrease of 55.32%, and achieved net profit of 842 million yuan, a year-on-year decrease of 41.15%. Mainly due to: 1) the net profit base for the return of Chia Tai Qingchunbao's large net profit base; 2) Shanghai Pharmaceutical Cansino's estimated impairment impact.

R&D is accelerating, and growth on the industrial side can be expected

The traditional Chinese medicine sector continues to gain strength, and revenue from the industrial side is rising steadily. In the first half of 2023, the company's pharmaceutical industry achieved revenue of 14.699 billion yuan, a year-on-year increase of 12.64%, and a year-on-year contribution of 1,328 billion yuan in profit, an increase of 20.29% over the previous year. In the first half of 2023, the company continued to accelerate the development of large industrial varieties and traditional Chinese medicine products, focusing on promoting the release of large varieties such as Yangxin tablets, blood stasis capsules, Guanxining tablets, Baodan, Gastric Rehabilitation tablets, and ginkgo ketone esters. 23H1, the company's revenue in the traditional Chinese medicine sector increased by 21.64% to 5.120 billion yuan, driving a steady increase in overall industrial sector revenue. We believe that the company currently still has a lot of room to expand sales of large varieties of traditional Chinese medicine, and as the company gradually accelerates the development of the out-of-hospital market, the growth of the company's traditional Chinese medicine business is expected to accelerate, driving long-term steady growth in the industrial sector.

R&D is accelerating, and the advantages in the research pipeline are outstanding. In the first half of 2023, the company's total R&D investment further increased by 25.91% to 1,218 million yuan, and the total number of pipeline layout projects reached 64. Of these, 3 were submitted for pre-NDA or marketing applications, and many were in key research or clinical phase III stages. 1) The NDA marketing application for I001 tablets for hypertensive indications was accepted in June 2023, and there is plenty of room for future dosage. 2) X842 is a class 1.1 new potassium ion competitive acid blocker (P-CAB) oral drug introduced by the company. The NDA marketing application for reflux esophagitis indications was accepted in February 2023. 3) The new class 2 drug lansoprazole sodium bicarbonate capsules introduced by the company (Xinweining?) It was officially commercialized in May of this year. Xinwei Ning? It is a globally exclusive product, mainly aimed at stomach acid disease, and there is a lot of room for dosage. We believe that the advantages of the products being developed by the company are obvious, and that some products are progressing rapidly. It is expected that next year will usher in a harvest period and accelerate performance growth.

The commercial sector is recovering at an accelerated pace, and innovative platforms are growing at an accelerated pace

In the first half of 2023, the company's commercial sector revenue increased 19.50% year on year to 117.893 billion yuan, contributing 1,770 billion yuan, up 1.43% year on year. Profit margin declined slightly. Mainly due to changes in the company's category structure, sales of some high-margin products declined. The company focuses on building an innovative pharmaceutical service platform, providing one-stop management services for the entire supply chain in the four major fields of pre-listing cooperation, import and export services, national circulation, and innovative value-added. In the first half of 2023, the company's innovative drug sector successfully introduced 14 imported general products, with sales up 24% year on year; total imported vaccine agency business increased 15.7% year on year; sales of non-pharmaceutical businesses such as devices and health were about 20.4 billion dollars, up about 22.16% year on year. We believe that the company's business sector layout is perfect, and that the competition barriers for full-chain one-stop management services are high, which is expected to drive steady growth in performance over the long term.

In-hospital diagnosis and treatment order continues to be restored, and the industrial sector is growing steadily

Looking ahead to the second half of the year, we believe that the in-hospital diagnosis and treatment order is steady and improving, demand for medication continues to be released, and the company's in-hospital distribution business is expected to show a restorative growth trend, but the base for the second half of the year is relatively large, and distribution business revenue growth may slow down month-on-month. In terms of the industrial sector, the company will continue to implement large varieties of traditional Chinese medicine and out-of-hospital development strategies, and business growth is expected to accelerate. However, considering that some large varieties are affected by collection and price cuts, the overall revenue of the industrial sector may maintain steady growth. Furthermore, the company will continue to optimize the production capacity layout of the pharmaceutical manufacturing business to promote cost reduction and efficiency, and the profitability of the industrial sector may steadily increase. Overall, the company is a leader in the domestic pharmaceutical industry and commerce. Collaborative development of industry and commerce has advantages, and the company's net profit base after deducting non-attributable parents is relatively low in the second half of the year, and the profit side is expected to maintain steady growth in the second half of the year.

Structural adjustments affect gross profit margins, and fee control effects are obvious

In the first half of 2023, the company's comprehensive gross margin was 12.87%, down 0.58 percentage points from the previous year. Mainly due to the company's product structure adjustments, the sales share of some high-margin varieties declined. The management expense ratio was 2.08%, down 0.01 percentage points from the previous year, and remained stable; the sales expense ratio was 5.83%, down 0.25 percentage points from the previous year, and the fee control effect was obvious; and the financial expense ratio remained flat at 0.58%. Net cash flow from operating activities was 1,638 billion yuan, compared to -556 million yuan in the same period last year, mainly due to an increase in sales scale; the number of accounts receivable turnover days fell 1.38 days year on year to 97.86 days, which remained stable; the number of inventory turnover days was 52.67 days, up 1.6 days from the previous year, and remained stable; and the number of accounts payable turnover days increased 2.26 days year on year to 74.51 days, which remained stable. The rest of the indicators are generally normal.

Profit forecasting and investment ratings

We expect the company to achieve operating income of 264.441 billion yuan, 296.130 billion yuan and 331.64 billion yuan respectively from 2023 to 2025, with year-on-year increases of 14.0%, 12.0% and 12.0%, respectively, and net profit of 5.109 billion yuan, 6.283 billion yuan and 7.034 billion yuan, respectively, with year-on-year increases of -9.0%, 23.0% and 12.0%, equivalent to 1.38 yuan/share, 170 yuan/share and 1.90 yuan/share for EPS, corresponding to 12.8X, 10.4X, 9.3X Excluding the impact of Cansino's impairment in the first half of the year, the company is expected to achieve 5.575 billion yuan in net profit for the full year of 2023, a slight decrease of 0.75% over the previous year, mainly due to large non-current profit and loss due to land collection and storage in '22. We believe that Cansino's impairment is only an act of participating companies, and that the high profit base formed by land collection and storage is also a transient factor. The correlation with the company's main business is not strong. The company's main business situation continues to improve, and the purchase rating is maintained.

Risk analysis

1) Risk of drug price reduction: The normalization of medical insurance fee control and payment method reform will push the prices of some drugs to be further lowered, which may have a great impact on the company's earnings;

2) New drug research and development risks: Innovative drug R&D projects have a long cycle and large investment, and there is some uncertainty about the relevant progress, approval results and timing. If the progress of new drug development falls short of expectations or R&D fails, or there is an adverse effect on the company's long-term revenue growth; 3) Market competition intensifies: market competition intensifies: major competitors or newcomers in the market may weaken the company's comparative advantage and sustainable development ability, which in turn affects the company's long-term development;

4) The performance of the subject matter of epitaxial mergers and acquisitions did not meet expectations, causing significant loss of goodwill: if the integration of the company's outsourcing targets falls short of expectations, it may cause loss of goodwill, which in turn will affect the company's performance.